4. standard cost
⇒Predetermined cost of manufacturing a unit
⇒Like a norm and can be accepted as standard
Pounds of materials
Hours of labor required
%age of plant capacity to be used
Purposes of standard costs
Establishing budgets
Controlling cost and motivating and measuring efficiencies
Promoting possible cost reduction
Simplifying costing procedures and accelerating cost reports
Assigning cost to materials, work in process, and finished
goods inventories
Forming the basis for establishing bids and contracts and for
setting sales price
5. setting standards:
Physical Standards:
1) Basic standards
yard stick against which both expected
and actual performances are compared
2) Current standards
I. Expected actual standards: set for an expected
level of operations and efficiency
II. Normal standards: set for normal level of
operations
III. Theoretical standards: an ideal level and constitute
goals to be aimed for rather than performances
IV. Materials and labor costs: based on normal current
conditions,
6. Setting standards continue…
IV Factory over head: based on normal conditions
of efficiency and volume
V Standard established for a definite period of time
VI Standards must not be too loose or too tight
Materials cost standards
1)A materials price standards: determining the
expected price of a unit of material.
⇒ Price Standards: Checking the performance of
purchasing department
⇒ Measuring the effects of increases and decreases on the
company’s profits
7. ⇒Price variance: Difference b/w actual and
standard price
Materials cost standards continue..
⇒materials quantity standards: the amount
of direct materials that should be required to
complete a single unit of product
⇒Materials quantity variance: comparison of actual
quantity of materials used and the standard quantity
allowed
8. Labor cost standards:
established to control labor costs
⇒Direct labor rate standard: standard means
calculating an expected hourly rate for labor costs.
⇒Direct labor rate Variance: measures any
deviation from standard in the average hourly rate
paid to direct labor workers
⇒Direct labor time standard: the standard time
required to manufacture a unit of product under
normal working conditions
⇒Labor efficiency variance: This variance
measures the productivity of labor time
9. FOH COst standards
⇒Standard FOH rates deal with estimated
direct and indirect FOH and its applications
to jobs and products
Overhead Budget:
Provide a budget allowance for specific,
predetermined level of activity
Flexible Budget:
Allowance for various level of Activities
Maximum limit
Amount set up in
flexible budget
10. Fixed Expense:
⇒ remain fixed within a normal range of
activity
⇒ Vary per Unit
⇒No. Of Units
fixed OH
Variable Expense:
⇒ increase with increase in volume
⇒ Remain fixed per unit
Variable OH Variances
⇒Difference of Actual Variable Costs and
Flexible Budget (Applied) Variable OH
11. Fixed OH Variances:
⇒Difference between budgeted Fixed FOH and
Absorbed Fixed OH.
Benefits of Variance Analysis:
⇒Measure the success of failure of its control of
OH.
Standard FOH rate:
⇒Predetermined rate based usually on Direct
Labor hours.
⇒Other Bases For FOH rate: Direct Labor
Dollar and Machine Hours
12. FOH Variances
Overall or net FOH Variance:
⇒Difference between actual and Applied FOH
MetHOds FOr Variance
analysis
Two Variance Method:
1) Controllable Variance: Difference
between actual variance and Budget
Allowance based on Standard hours
13. 2) Volume Variance: Difference Between
budget Allowance and Standard Expenses
Standard Expense = (Standard hours ×
Standard OH rate)
Three Variance Method:
1)Spending
Variance:
Difference
between actual expenses and Budget
Allowance based on actual hours worked
2) Idle Capacity Variance: Difference
between budget allowance based on actual
hours and actual hours worked multiplied by
Standard OH rate
14. 3) Efficiency Variance: Difference b/w
actual hours worked multiply by Standard OH
rate and Standard hours allowed times
standard OH rate
Four Variance Method:
1)Spending Variance:
2)Variable
Efficiency
Variance:
Difference b/w actual hours worked and
standard hours multiply by VOH rate
Sum of spending and variable efficiency
variance equals to controllable variance
15. 3) Fixed Efficiency Variance: difference
b/w Applied Fixed OH and Fixed Standard OH
4) Idle Capacity Variance:
Mixed and yield Variances:
Mix Variance:
Difference b/w Standard Cost of formula
materials and the standard cost of materials
actually used
Yield Variance:
Yield: the amount of prime product
manufactured from given amount of materials
16. Yield Variance: difference b/w actual
production and expected production
Material Variance:
1) Price Variance: Difference b/w actual
price and applied standard price on the
capacity
2) Mix Variance: results from combining
materials in a ratio different from standard
material specification
3) Yield Variance:
4) Quantity Variance: difference b/w Actual
quantity used and standard quantity allowed
17. Total Quantity Variance: difference of
actual quantities at standard prices to actual
output quantity at standard material cost
Labor Variance:
1) Rate Variance: difference b/w standard
and actual rates
2) Efficiency Variance:
3) Yield Variance:
FOH Variance:
1)
2)
3)
4)
Spending Variance:
Idle Capacity Variance
Efficiency Variance
Yield Variance
Editor's Notes
A standard cost is predetermined cost of manufacturing a single unit or a number of product units during a period in the near future
A standard is like a norm and whatever is considered normal can generally be accepted as standard such as:
Pounds of materials
Hours of labor required
Percentage of plant capacity to be used
Expected actual standards it is set for an expected level of operations and efficiency and reasonably close estimates to actual results
Normal standards it is set for normal level of operations and intended to represent challenging but yet attainable results
Theoretical standards it is an ideal level and such standards constitute goals to be aimed for rather than performances that can be currently achieved
Materials and labor costs are based on normal current conditions, allowing for alterations of prices and rates and tempered by desired efficiency level.
Factory over head is based on normal conditions of efficiency and volume
Standard must be established for a definite period of time to be effective in control
Standards must not be too loose or too tight
Materials and labor costs are based on normal current conditions, allowing for alterations of prices and rates and tempered by desired efficiency level.
Factory over head is based on normal conditions of efficiency and volume
Standard must be established for a definite period of time to be effective in control
Standards must not be too loose or too tight
Two standards must be developed for direct materials costs
A materials price standards:
Setting direct materials price standard means determining the expected price of a unit of material.
price standards permits:
Checking the performance of purchasing department as well as various internal and external factors
Measuring the effects of increases and decreases on the company’s profits
If the actual price is more or less than the standard price, a price variance occurs.
Standard quantity per unit of direct materials is the amount of direct materials that should be required to complete a single unit of product, including allowances for normal waste, spoilage, rejects, and similar inefficiencies.
Material Quantity variance: It is the comparison of actual quantity
of materials used and the standard
quantity allowed, both priced at standard cost.
Direct labor standards are established to control labor costs. Two commonly used direct labor standards are direct labor rate standard and direct labor time standards.
Setting direct labor rate standard means calculating an expected hourly rate for labor costs. It includes not only wages per hour but also other costs associated with labor such as fringe benefits, employment taxes etc
Direct labor rate Variance measures any deviation from standard in the average hourly rate paid to direct labor workers. In other words, direct labor rate variance is the difference between the amount of actual hours worked at actual rate and actual hours worked at standard rate.
Direct labor time standard is the standard time required to manufacture a unit of product under normal working conditions. This time is normally expressed in hours.
The quantity variance for direct labor is generally called direct labor efficiency variance or direct labor usage variance. This variance measures the productivity of labor time
Flexible budget provides allowance for various level of activities. Flexible budget and Overhead budget both aim for the control of FOH. Control is achieved by keeping actual expense within ranges established by Budget.
Fixed Expenses are fully absorbed only by operating at volume on which rate is based.
The variance associated with VOH and Fixed FOH permit management to measure the success or failure of its control of OH and utilization of facilities
At the end of each period (e.g. month) Overhead actually incurred is compared with expenses charged into process using Standard FOH rate.
1)Spending Variance: Difference between actual expenses and Budget Allowance based on actual hours worked
Idle Capacity Variance: Difference between budget allowance based on actual hours and actual hours worked multiplied by Standard OH rate
Mix Variance: Due to the result of mixing basic material in a ratio different from standard material specification.
Yield Variance: obtaining a yield different from the expected yield on the basis of input
Efficiency Variance: Difference b/w actual hours worked multiply by Standard OH rate and Standard hours allowed times standard OH rate
Spending Variance: Difference between actual expenses and Budget Allowance based on actual hours worked
Idle Capacity Variance: Difference between budget allowance based on actual hours and actual hours worked multiplied by Standard OH rate
Yield Variance: difference b/w actual production and expected production
